Sei sulla pagina 1di 28

MODEL OF DEMAND

 The model of demand is an attempt to


explain the amount demanded of any good
or service.
DEMAND DEFINED
The amount of a good or service a
consumer wants to buy, and is able to
buy per unit time.

Demand slide 1
THE “STANDARD” MODEL OF
DEMAND
The DEPENDENT variable is the amount demanded.
The INDEPENDENT variables are:

 the good’s own price

 the consumer’s money income

 the prices of other goods

 preferences (tastes)

Demand slide 2
YOU COULD WRITE THE
MODEL THIS WAY:
 The demand for tacos

 QD(tacos) = D(Ptacos , Income, Pspaghetti , Pbeer ,

 tastes)

Demand slide 3
 ECONOMISTS HAVE HYPOTHESES
ABOUT HOW CHANGES IN EACH
INDEPENDENT VARIABLE
AFFECT THE AMOUNT
DEMANDED

Demand slide 4
THE DEMAND CURVE
 The demand curve for any good shows the quantity
demanded at each price, holding constant all other
determinants of demand.

 The DEPENDENT variable is the quantity


demanded.
 The INDEPENDENT variable is the good’s
own price.

Demand slide 5
THE LAW OF DEMAND
 The Law of Demand says that a decrease in a
good’s own price will result in an increase
in the amount demanded, holding constant
all the other determinants of demand.

 The Law of Demand says that demand curves


are negatively sloped.

Demand slide 6
A DEMAND CURVE
 A demand curve must look like this, i.e.,
be negatively sloped.
own
price

demand

quantity demanded
Market for tacos
Demand slide 7
The demand curve means:
You pick a price, such a p0, and the demand curve shows
how much is demanded.
own
price
p0

demand

Q0 quantity demanded
Market for tacos

Demand slide 8
What if the price of tacos were
less than p0?

How do you show the effect on


demand?

Go to hidden slide

Demand slide 9
At a lower price, consumers want to buy more.

own
price
p0

plower
demand

Q0 Q1 quantity demanded

Demand
Market for tacos slide 10
AN IMPORTANT POINT
 When drawing a demand curve notice that the
axes are reversed from the usual convention
of putting the dependent (y) variable on the
vertical axis, and the independent (x)
variable on the horizontal axis.

Demand slide 11
Other factors affecting demand
 The question here is how to show the effects
of changes in income, other goods’ prices,
and tastes on demand.

Demand slide 12
Suppose people want to buy more of a good when

incomes rise, holding constant all other factors


affecting demand, including the good’s own
price.
own price
How
Howdoes
doesthis
thisaffect
affectthe
the
demand
demandcurve?
curve?
$1/can

demand @ I = $1000
quantity of beer
Market for beer
Demand Go to hidden slide slide 13
This is a change in demand. It shows up
as a shift to the right of the original
demand curve.
own price

$1/can
demand @ I = $2000

demand @ I = $1000
quantity
Market for beer
Demand slide 14
Normal and inferior goods
defined
Normal good: When an increase in income
causes an increase in demand.
Inferior good: When an increase in income

causes a decrease in demand.

Demand slide 15
Pizza is a normal good.
What’s
What’sthe
theeffect
effectononthe
thedemand
demand
curve
curvefor
forpizza
pizzaififincome
incomerises
rises
own price toto$2,000?
$2,000?

demand @ I = $1000
quantity
Market for pizza
Demand Go to hidden slide slide 16
An increase in income increases demand
when pizza is normal.
own price

demand @ I = $2000

demand @ I = $1000
quantity
Market for pizza
Demand slide 17
Suppose instead that pizza was
an inferior good.

own price What’s


What’sthetheeffect
effectononthe
thedemand
demand
curve
curvefor
forpizza
pizzaififincome
incomerises
rises
to
to$2,000?
$2,000?

demand @ I = $1000
quantity
Market for pizza
Demand Go to hidden slide slide 18
 If pizza were inferior the demand would
decrease as income increases. Whether
a good is normal or inferior is a matter
of fact, not theory.
price

demand @ I = $1000
demand @ I = $2000
quantity
Demand
Market for pizza slide 19
Substitutes defined
Substitutes: Two goods are substitutes if an
increase in the price of one of them causes
an increase in the demand for the other.
Thus, an increase in the price of pizza would

increase the demand for spaghetti if the


goods were substitutes.

Demand slide 20
The graph shows the demand curve for
spaghetti when pizzas cost $10 each.
own price
What’s
What’sthe
theeffect
effectof
ofan
anincrease
increasein
in
the
theprice
priceofofpizza
pizzatoto$15?
$15?

demand @ pizza price of $10


quantity
Market for spaghetti
Demand Go to hidden slide slide 21
An increase in the price of pizza, a substitute
for spaghetti, causes an increase in demand
for spaghetti.
own price

demand @ pizza price of $15.

demand @ pizza price of $10


quantity
Market for spaghetti
Demand slide 22
Complements defined
Complements: Two goods are complements
if an increase in the price of one of them
causes a decrease in the demand for the
other.
Thus, an increase in the price of pizza would

decrease the demand for beer if the goods


were complements.

Demand slide 23
The graph shows the demand curve for
beer when pizzas cost $10 each.
price of What
Whatisisthe
theeffect
effecton
onthe
the
beer market
marketfor forbeer
beerofofan
an
increase
increasein
inthe
theprice
priceofofpizza
pizza
to
to$15?
$15?

demand @ pizza price of $10

quantity
Market for beer
Demand Go to hidden slide slide 24
When beer and pizza are complements, an
increase in the price of pizza decreases
the demand for beer.
price of
beer

demand @ pizza price of $10

demand @ pizza price of $15.


quantity
Market for beer
Demand slide 25
The graph shows the demand curve for
umbrellas on sunny days.
What’s
What’sthetheeffect
effecton
ondemand
demandof
of
price of ititbeing
beingaarainy
rainyday?
day?
umbrellas

demand on sunny days


quantity
Market for umbrellas
Demand Go to hidden slide slide 26
This is an example of a change in tastes.
Demand increases.

price of
umbrellas

demand on rainy days

demand on sunny days


quantity
Market for umbrellas
Demand slide 27
DEMAND SUMMARY
Demand is a function of own-price, income, prices
of other goods, and tastes.
The demand curve shows demand as a function of a

good's own price, all else constant.


Changes in own-price show up as movements along

a demand curve.
Changes in income, prices of substitutes and

complements, and tastes show up as shifts in the


demand curve.

Demand slide 28